6 tips to manage student loan debt

A study released in January by credit reporting agency TransUnion found that the average student loan debt rose 30 percent between 2007 and last year to $23,829.File photo

Associated Press

Finding a job in a slow-growing economy is daunting enough without new financial obligations.

Yet that's the challenge many university students graduating over the next few weeks will face before too long. The clock on their student loans will begin counting down to their first payment due date.

Both federal and private student loans give borrowers a six-month grace period before they're required to begin making payments. Grads also have options to defer payments in certain situations, or even have their balance reduced if they qualify.

But eventually the bill will come due, and it won't be insignificant.

A study released in January by credit reporting agency TransUnion found that the average student loan debt rose 30 percent between 2007 and last year to $23,829.

And even missing a few payments early on can hamper credit scores -- not a good scenario when you're just venturing out on your own and looking to land a job.

Here are six tips on how new grads can manage their student loan debt:

1. Understand your loans

It's essential to know the terms of your loan in order to evaluate your options for repayment, or to request a deferment when your grace period expires. For example, Stafford loans have a six-month grace period, while Perkins loans give you nine months before your first payment is due. Grace periods for other types of federal loans and private student loans can vary.

Ask your lender or check out nslds.ed.gov, which shows loan details on federal loans. If you have private student loans, you'll have to contact the lender directly.

"Whether you owe a little or a lot, it's crucial to know how much you owe, to whom and what your repayment options are," says Lauren Ascher, president of the Institute for College Access & Success, a nonprofit advocacy and research organization.

2. Know your payment options

Federal loans are set up to be paid back over a 10-year period. But there are other options if you can't afford your monthly payments under that standard plan. You can extend the length of time to pay back the loan beyond 10 years, which will lower the monthly payment, but you will pay more over the life of the loan. Some may qualify for plans that peg the monthly payment to a certain percentage of their annual income. And if they're on such a plan for 25 years, anything they still owe will be forgiven.

The Project on Student Debt, which is managed by Ascher's organization, has more information on income-based repayment plans on this site: Ibrinfo.org.

On private student loans, repayment options will vary from one lender to the next. Ascher suggests checking the loan documents or contacting your lender.

3. Consider deferments and forbearance

Can't find a job? Can't afford any student loan payments? If you have federal student loans, you can temporarily postpone your payments by asking for a deferment or forbearance.

In the case of a deferment, you're allowed to temporarily put off making payments on your loans. During this period, interest does not build up on three types of federal loans: direct subsidized loans, subsidized federal Stafford loans and Federal Perkins loans.

On other types of federal loans, your payments will be put on hold, but the balance of your loan will continue to rack up interest.

Several factors may qualify you for a deferment once you're done with school, including economic hardship, unemployment or serving in the military on active duty during a war.

If you don't qualify for a deferment, you may request a forbearance, which can generally buy you up to 12 months without making payments. However, you'll continue to pile up interest on your balance, even with subsidized loans. For more details on how these options work, go to this U.S. Department of Education website: Studentaid.ed.gov

4. Avoid racking up missed payments

Missing payments on your federal student loans can seriously hamper your ability to get credit, especially if you're starting out and don't have much of a credit history.

In the case of federal student loans, you will be declared to be in default if you miss nine payments in a row. At that point, the government will ask you to pay back your entire loan balance immediately, and will resort to garnishing your wages or taking it out of your income tax refunds if need be.

Experts recommend contacting your lender as soon as payments become a problem to discuss options.

Keep in mind, unloading your student loan debt via bankruptcy is very difficult, though not impossible. You'll need to persuade the court that what you owe on your loan will result in an undue hardship on you and your dependents. Of course, even if you succeed, filing for bankruptcy has steep and long-standing consequences on your ability to get credit.

5. Go beyond minimum payments

One way to lower the total cost of your loan is to pay a little extra every month, or even make an extra payment every few months. That will help bring down the principal. Ascher's organization recommends including a written request to the lender to ensure the extra payment amount is applied to the principal, not interest or other fees due.

6. Weigh a loan consolidation

Consolidating several of your student loans can help you manage your debt because you only need to keep track of a single monthly payment. You can also extend the repayment period.

However, if your federal loan predates July 1, 2006, it's likely it has a variable interest rate, which means you can probably get that rate lowered now. Consolidating loans issued after that date may not save you as much money on interest payments, however.

Keep in mind that if you take out a private student loan to consolidate federal loans, you will lose access to the borrower protections built into those loans, such as unemployment deferments.

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